Hungarian rate setters hint at return to benchmark easing

By bne IntelliNewsOctober 25, 2016

In a bid to increase the bank system’s liquidity and ease monetary conditions further, Hungarian rate setters reduced the overnight lending rate and lowered the required reserve ratio for banks as they met on October 25, the Magyar Nemzeti Bank (MNB) announced.

The central bank has repeatedly guided that it will keep its record-low base rate of 0.9% on hold this year, but loosen policy using unconventional tools. However, the incremental changes may not be enough to revive fading growth and boost inflation, and the accompanying statement from the rate setters suggests a possible return to conventional rate cuts could be on the cards.

The MNB reduced the overnight lending rate by 10bps to 1.05%, while it left the overnight deposit rate unchanged at -0.05%. The MNB also halved the required reserve ratio for banks to 1% as of December 1. It expects the measure will raise liquidity in the bank system by HUF170bn.

These tools have helped to push the yields on 3-month and 12-month T-bills to record low levels. The downward pressure on local interest rates and bond yields is likely to intensify, especially on short-dated debt, suggest analysts at Erste Group.

At the same time, Capital Economics argues that unconventional tools have not had a significant impact on monetary conditions, pointing out that overnight interbank interest rates have risen and longer-term interbank rates only slightly fallen since the last rate setters' meeting.

Small tweaks "have tended to be much less effective at loosening policy than straightforward interest rate cuts," the claim, forecasting that with growth and inflation set to remain weak, the MNB will return to conventional rate cuts in the next three to six months.

That prediction appears to be supported by a change of language in the MNB statement. While one month earlier it specified that further easing would be possible via unconventional tools, the central bank on October 25 did not restrict itself regarding further easing.

“If subsequently warranted by the achievement of the inflation target, the council will stand ready to ease monetary conditions further,” the MNB merely wrote.

While the decision to leave the benchmark interest rate on hold was correctly anticipated by the market, the decision on the reduction of the reserve requirement ratio came as a surprise and the forint started to ease after the release of MNB’s statement.

The MNB "likes to surprise markets and is willing to do anything in its power to meet its goals of lower rates and weaker forint,” Gergely Urmossy at Erste writes. MNB officials, however, repeatedly deny having any exchange rate target.

The cost of insuring exposure to Turkish debt grew to a one-month high on March 16 as anxieties about Turkey’s economic difficulties and the Afrin military showdown in Syria unsettled markets.
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